OVERVIEW

● Foreign net selloff of Malaysian debt securities extended for the third month in June, totalling RM6.6b after May’s staggering selloff of RM12.9b. The outflow lowered foreign holdings share in Malaysian debt securities to the lowest in eight years or since June 2010 at 13.7% (May: 14.2%). For 2Q18, the total outflow summed up to RM24.2b, eroding the RM3.4b inflows into the debt market in 1Q18. Year-to-date, the total outflow from the Malaysian debt market summed up to RM20.8b. Investors’ exodus from the domestic debt market extended to June as negative news flow emerge on Malaysia’s debt level, sparking concerns of the government’s ability to finance its debt level. Hence, creating a higher risk premium for the holding of Malaysian government debt. On the external front, the US Fed’s tightening move triggered bond traders move away from the emerging market as a whole.

● The month’s selloff was attributable to a total of RM6.7b (May: RM9.8b) outflow from long-dated securities, which reduced the foreign holdings share of long-dated securities (MGS+GII) to 24.7% in June (May: 25.9%) or the lowest since May 2011. Consequently, the average local benchmark 10-year MGS bond yield rose further to 4.21% in June (May: 4.17%), widening the gap with the benchmark 10-year Treasury yield to 130 basis points from 120 basis points in May. Meanwhile, short-dated securities registered a marginal inflow of RM0.08b in June (May: -RM2.3b), raising the foreign holdings share of short-dated securities to 56.9% (May: 53.9%). The preference of short-dated securities reinforces our view that foreign investors selloff during the month is primarily due to renewed concerns of Malaysia’s debt level and the government’s ability to refinance its debt.

● With a total of RM21.0b conventional and RM16.0b sukuk bonds due for maturity in 3Q18, we expect the selloff from the bond market to persist in the coming quarter. The recent US tariffs on China’s imports has also created much uncertainty in the emerging market, resulting in a shift of investors’ demand away from emerging markets’ assets to US safe haven assets, driving down the US Treasury yields in the past week to 2.84% from 2.86% the preceding week.

● However, the local govvies have also seen its yields falling over the past week, indicating that investors could be on the hunt for high yielding assets including Malaysia’s bonds. Additionally, we expect sentiments to gradually improve. Firstly, we see more certainty on the timing of Fed’s rate hike following its June meeting. Secondly, with the completion of the Pakatan Harapan government’s 100 days in office and introduction of new policies, we expect improvement in sentiments to cap capital outflow. Hence, while we expect capital outflow to persist in the coming quarter, we expect it to be limited. In the interest of ensuring market stability, we expect BNM to leave the Overnight Policy Rate unchanged at 3.25%.

Source: Kenanga Research - 10 Jul 2018